DaimlerChrysler Steps on the Gas

July 18, 2002

Shell-shocked investors can still find some good news. On July 18, DaimlerChrysler reported a big improvement in second-quarter profits, a signal that its recovery may be shifting into gear. Bolstered by a strong profit contribution from Chrysler and higher earnings at the Mercedes-Benz luxury car division, net income jumped 52%, to $1.1 billion, on sales of $39 billion.

The underlying earnings figures were even more encouraging. Operating income, excluding restructuring charges and one-time items, more than doubled to $1.9 billion. "We're on the right path," DaimlerChrysler CEO Juergen Schrempp said during a teleconference.

PERSONAL BEST. It was good news for Schrempp, too. The head of Daimler-Benz since 1995, he acquired Chrysler in 1998, then a controlling stake in Japan's Mitsubishi Motors, part of Hyundai, and a pair of truck and engine companies to create a global behemoth with the resources to build on Mercedes-Benz's technological prowess. Publicly, he never doubted his strategy. But investors rued all those deals, and the empire began to look shaky two years ago as Chrysler plunged into the red. In the fall of 2001, DaimlerChrysler's supervisory board extended Schrempp's term as CEO to 2005, but he remained under intense pressure to deliver.

The second-quarter results were all the more remarkable given the tough business climate. With 2002 vehicle sales down slightly in Europe and also in the U.S., where auto makers are locked in a profit-eroding price war, DaimlerChrysler has been under pressure in its two biggest markets. In February, the Stuttgart giant slashed its operating-profit forecast for 2002, saying it would not be able to attain the yearly "milestone targets" laid out in a 2001 recovery plan.

Schrempp said on July 18 that the political and economic environment remained uncertain, but he raised the company's profit forecast for the year by more than half a billion dollars -- lifting it to at least $4 billion. While that figure is less than half the earnings recorded in 1999, the first full year of the DaimlerChrysler merger, it far outstrips the $1.2 billion earned in 2001.

CHRYSLER RISING. Investors don't seem to be holding grudges. Indeed, in this wretched investing environment, some Old Economy giants are quietly turning into havens. General Motors and Ford also reported improved profits this week. DaimlerChrysler shares were up 3% in late trading on July 18. Since September, 2001, they have gained 50%, far outperforming German and U.S. stock indexes. "What's most impressive," says Christian Breitsprecher, an auto analyst at Deutsche Bank, "is the performance at Chrysler, where they pulled off such a strong profit improvement despite lower-than-expected sales."

By Breitsprecher's estimate, Chrysler CEO Dieter Zetsche wrung out around $1.2 billion in savings to generate $788 million in operating earnings for the second quarter, excluding restructuring charges, vs. a loss of $148 million in the same period a year earlier. In a promising sign for its future prospects, Chrysler has halted a slide in its U.S. market share and increased it, to 13.5% from 13%.

Plenty of hurdles remain. The third quarter is traditionally the industry's weakest sales period. Also, U.S. and European auto markets are not expected to rebound soon. In addition, Chief Financial Officer Manfred Gentz cautioned that, because of the slide in global equity markets, DaimlerChrysler would face a funding shortfall in its pension obligations. That wouldn't affect earnings in 2002 but might weigh on results in coming years if share prices don't recover. Schrempp also stressed that the quarterly results represented just a step in the group's progress, saying: "We're not yet where we want to be."

WAY TO GO. Still, DaimlerChrysler's divisions are heading in the right direction. The truck business narrowed its loss, despite a deep slump in the global market, and is forecast to show a profit for the year. Mitsubishi also contributed to DaimlerChrysler's earnings, after a restructuring that produced results ahead of schedule.

Mercedes-Benz, too, posted a small increase in profits, to $845 million, despite the changeover of its most profitable model, the E-Class sedan, which starts at $33,000 in Germany. The new model will hit U.S. showrooms in the fall. The car has received excellent reviews in Europe, and DaimlerChrysler says incoming orders are high. That holds the promise of more good news on the earnings front. By Christine N. Tierney in Frankfurt